When Is It Time To Refinance?

Now is the time of lower interest rates, and they are only going up.  Think of what you can do with all the money you’ll save by lowering your mortgage payment… or not.  There are many factors to consider when deciding if it’s right for you.  Check out these tips to find out when the best time to refinance is.

When it lowers your interest rate. 

Even lowering your interest rate by 1% will save you a substantial amount of money.  For example, a $450,000 loan with a 4.75 percent interest rate refinances into a 3.6 percent interest rate and will have a savings of an estimated $300 a month! If you refinanced a few years ago, it may be time to look at it again.

When it will shorten the length of your loan. 

We all know the importance of being debt-free.  When you refinance you are adding extra time onto your loan.  A savvy homeowner is always looking for ways to reduce debt, build equity, save money and eliminate that mortgage payment. Taking cash out of your equity when you refinance doesn’t help you achieve any of those goals.  That said, low interest rates have enticed many homeowners to refinance in order to shorten the length of their loan, often trading in a 30-year fixed-rate loan for a 15-year term.  Depending on rates you could use the equity in your home to shorten the length of time without lowering your monthly payment. 

When a fixed rate plan is better.

While ARMs start out offering lower rates than fixed-rate mortgages, periodic adjustments often result in rate increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to a fixed-rate mortgage results in a lower interest rate as well as eliminates concern over future interest rate hikes. 

When you can pay off a debt.

If there’s one thing we learned from the real estate crash, it’s that treating our homes like a discretionary spending account can be dangerous. Mortgaging yourself to the hilt and spending the cash on items that don’t appreciate or that are risky could spell disaster.  But if you use that money wisely for savings or to pay off a high rate credit card, then it’s worth taping into your home’s equity.

When you have a good credit rating.

Let’s be honest, you probably can’t get approved if you don’t have a good credit rating.  Though it is worth pointing out that if you have bad credit it is not a good time to refinance.  Get your free credit report to check your score and ask your lender for options. They might recommend a credit repair program or a streamline refi if you are eligible.

When the break even point is to high.

This is the amount of time it will take for you to recover the closing costs on the new loan. The break-even point is calculated based on how much you pay in closing costs and what your new interest rate will be.  Typically closing costs are between 2-5% of the total cost.  For example, if you pay $3,000 in closing costs and your payment only drops by $50 a month, it’ll take 60 months before you break even.  If you’re planning on moving before the break-even period ends, refinancing probably doesn’t make much sense since you won’t be reaping any significant financial benefits in the long run.

Before you refinance it’s a good idea to get a home valuation and talk to your trusted lender.  You can get a free home valuation here.  For more tips and advice, call Helen today at 847.967.0022 or email [email protected].